3 Reasons to Buy TD Stock Like There’s No Tomorrow

There’s no reason not to buy some TD stock today for its cheap valuation and big dividend! Expect to hold at least a few years, though.

| More on:
Man data analyze

Image source: Getty Images

Investing can be simple. If you need more persuasion to put some of your long-term capital in a solid investment like Toronto-Dominion Bank (TSX:TD), here you have it. First, the big Canadian bank stock has underperformed. Second, it trades at a good valuation. Third, it offers more income than historical levels.

TD stock has underperformed recently

I don’t believe it! Toronto-Dominion stock has underperformed the Canadian bank sector as well as the Canadian stock market over the last one-, three-, and five-year periods. According to YCharts, over the last five years, TD stock delivered total returns of about 40% (or almost 7% per year). In comparison, the Canadian bank sector returned approximately 51% (or 8.6% annually). And the Canadian stock market returned 61% (or just over 10% per year).

TD Total Return Level Chart

TD, ZEB, and XIU Total Return Level data by YCharts

BMO Equal Weight Banks Index ETF is used as a proxy for the sector. Notably, this exchange traded fund essentially has an equal weight in the Big Six Canadian banks. And the iShares S&P/TSX 60 Index ETF is used as a proxy for the Canadian stock market.

Not all hope is lost, though. Stocks often take turns outperforming. Over the last 10 years, TD stock has outperformed the two ETFs, delivering total returns of 145% (or 9.4% per year) as shown in the graph below. So, TD stock’s recent underperformance could be a good reason to buy for long-term solid returns potential.

TD Total Return Level Chart

TD, ZEB, and XIU Total Return Level data by YCharts

The big Canadian bank stock is at a good valuation

To be sure, I reviewed TD stock’s valuation. At $81.45 per share at writing, the large North American bank stock trades at a price-to-earnings ratio of about 10.2, which is a discount of about 12% from its long-term normal valuation.

One thing that has been pressuring the stock is higher loan loss provisions that have cut earnings. In other words, higher interest rates since 2022 are likely to lead to more bad loans. However, I believe just like past bad economic times, it will come to pass, and the stock will recover. A normalization of its valuation could potentially bring the stock back to the $98 level over the next two years.

Buying stocks at good valuations (i.e., not overpaying for stocks) is one key component that can help drive decent returns for long-term investors. Other than that, earnings growth will also drive stock price appreciation. In the case of TD, it also pays out a safe dividend that provides stable returns through the economic cycle. That is, the TD stock price can go up and down, but we can expect its dividend to be safe and growing over time.

TD offers a high dividend yield

Over the last 20 years or so, TD stock’s dividend yield has seldom gone above 4%. When it offers a relatively high dividend yield versus historical performance, it suggests the stock is potentially a good buy. At the recent price, TD offers a dividend yield of 5%.

Even being super conservative and assuming a long-term 4% earnings growth rate, combined with the 5%, and expecting no valuation expansion, we can still project approximated long-term returns of about 9% per year. That’s a pretty low expectation but would still be a decent return for a blue chip stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Buy 32 Shares in This Glorious Dividend Stock and Create $1,074.88 in Passive Income

This dividend stock is also a growth stock you're going to want on your side over the next year and…

Read more »

Mature financial advisor showing report to young couple for their investment
Energy Stocks

New Study Shows 36% of Couples Hide Spending From Partner, And It’s a Pressure Point

Having the hard talk? It can literally pay to do so. Here's how to stop holding out on your partner…

Read more »

Stocks for Beginners

Value Investors: Are You Buying and Holding Forever? Think Again

Value stocks are great, but if you don't have a goal in mind that stock can quickly turn from value…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Stocks for Beginners

2 Stocks Under $50 New Investors Can Buy Confidently

Are you new investor looking to start small before buying stocks trading in hundreds and thousands? You could consider these…

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

3 Undervalued Software Stocks Set to Jump in 2024

These software stocks are overdue for a recovery, and that should certainly happen as they move back to profit in…

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Dividend Stocks

Planning a Wedding? Here’s How to Actually Make Money on the Big Day

Inflation, interest rates, it all adds up when planning a wedding. So how can you ask for cash, keep costs…

Read more »

Caution, careful
Stocks for Beginners

2 Threats to the Market Rally to Keep a Close Eye On

There are two threats that could possibly trigger another selloff, so be sure to watch for them in the near…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Stocks for Beginners

This Phenomenal Canadian Growth Stock Jumped 9% and Still Has More Upside

This Canadian stock surged after beating earning estimates, but there is even more room to run for this stock climbing…

Read more »